Loan options - invest more or pay more down?

I've been playing around with numbers a lot this weekend, looking at different loan terms and interest rates.
I've come down to one fundamental question: which is better:

a) to make a large down payment, get 5 year loan <2%
b) to invest the down payment, get 7-8 year loan at <3.5%
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Option (a) results in a shorter loan term at lower interest.
With option (b) I can likely earn more on the investment, despite the higher interest rate.

Option (b) can look VERY good on paper if you look at 7-8 year loans vs 7-8 year ROI, even assuming only 6% ROI. However, this option means a small down payment on the car, and small monthly payments, thus the loan will be upside down for probably the first 5-6 years. In that case selling the car during those years means pulling the investment $$ early, possibly wiping out the investment earnings. Although I plan to keep my MS for many years, being "trapped" like this could be annoying.

And of course we never know what the stock market will do, investments can go either way.

I'm going with a) - the rates for 5yr loans are great. Putting a large down payment down also means that I have available credit for other loans during the next 5yrs - maybe another car, moving house, etc...

if you get a 7/8 year very large loan, you may not be able to get any other loans for that period, and that felt more 'trapped' to me.

Actually the more I look at the numbers, I forgot to factor in the savings of the monthly payment due to option (a) being a shorter term loan, this tends to wipe out the advantage gained by investing the original down payment with option (b), unless one assumes a much higher ROI than 6%.

The optimum mix would be lowest rate at the longest allowed duration. You would only want to do the longer terms (w/higher rates) if you can't swing the monthly payments.

But since you're talking investment then thinking you have all the cash anyways.

It's similar to buying down points with a mortgage, that really helps if you're going to keep the long-term otherwise why spend the extra down if you're going to flip in 5yrs you'll never see the point savings.

As with all these calculations we need to make your best assumptions and run the math.

If you're getting a loan for less than 2%, I would put NOTHING down. Surely you can invest that down payment and make more than 2%.

If you borrow $120k and put nothing down, with a rate of 1.99% for five years, the interest over the life of the loan will cost you $6168.

If you borrow $120k and put $30k down, with a rate of 1.99% for five years, the interest over the life of the loan will cost you $4626.

So that $30k down payment saved you $1542 over five years. If you had invested that $30k (And used it over the life of the loan), surely you would have made out better than "saving" the $1542 because of the down payment. YMMV.

I got 1.25% and put nothing down. This is free money--- check out Alliance FCU and others...

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Agreed. Unfortunately, everyone's rates are moving up. Best I'm seeing now is Energy FCU (1.11%, but a max of $70k.) Otherwise, seems the best rates are closer to 2%. Alliance is at 1.85% (If it's the same Alliance you meant - lots of them out there! https://www.afcutx.com)